Comments of James L. Gattuso to The President's Commission on theUnited States Postal Service

In
accordance with the procedures adopted by the Commission at its
January 8, 2003 public meeting, I respectfully submit these
comments to the President's Commission on the United States Postal
Service.

This Commission,
established in December by President Bush, is charged with
"articulating a proposed vision for the future of the United States
Postal Service" and recommending reforms needed to "ensure the
viability of postal services." This is a daunting
task. In the wake of
technological changes that are fundamentally changing the way
Americans communicate, the Postal Service is an increasingly
troubled organization.
As the General Accounting Office stated in a report last year: "A
transformation [is needed] if USPS is to remain viable in the 21st
century."[1]

In the long term,
it is not clear what role the physical delivery of mail will have
in U.S. society. What
is clear is that that role is changing, and the USPS will have to
change as well. This
certainly means a leaner, more efficient organization, and one with
more flexibility to adapt to market conditions. Perhaps most importantly,
it should also mean an organization without the special protections
- including the monopoly on letter mail - that have in the past
dulled the postal services ability and incentive to react to
change.

The
challenge from the Internet.The challenge to the Postal Service from electronic
communications is real and growing. Despite the economic
downturn among high-tech firms over the past few years, the
Internet's usage and popularity has continued to grow. According to a recent
report by Jupiter Media Metrix, half the population, some 142
Americans were online in 2001, with the number projected to rise to
211 million by 2006.[2] And the single most popular
use of the Internet is e-mail, used by 84 percent. An increasing number are
also using the Internet for transactions that may have previously
taken place through the Postal Service, with 39.1 using the
Internet to make purchases, and 17.9 percent banking online.[3]

One after another,
forms of communication are moving into cyberspace and away from the
post office. For many
office workers, it's a rare day when they stick a stamp on an
envelope, instead of simply pressing the "send" button on a
computer. Even
official communications are moving on-line. (These comments, for
instance, will be sent to the Commission electronically, and not
through the mail.)
Outside the office, more and more communications are taking place
electronically as well. Once unthinkable, today
it's not even unusual to receive a greeting card by e-mail. With increasing numbers of
American subscribing to always-on, high-speed Internet access
services, these trends may accelerate.

Ironically, the
other great challenge facing the Postal Service - security - may
also be accelerating this trend. The anthrax attacks of 2001
drove large numbers of Americans away from the mail, forcing them
to find alternative ways to communicate. Having found them, they may
never come back. In
Washington, large portions of Capitol Hill and the executive branch
have been without normal mail deli very for months, yet life has
gone on much as before.

Decreasing
mail volume. This shift has already shown itself in postal volume
statistics. As shown
in briefing prepared for this Commission by Richard Strasser, the
chief financial officer of the Postal Service, total mail volume
has decreased for the past two years by some five billion pieces,
from 208 to 203 billion. First-class, single piece letter volume
has dropped by almost 10 percent since 1998, from 54.3 to 49.3
billion pieces.[4] The bottom line effect has
been a series of deficits for the Postal Service (although a
surplus is expected this year).

The Postal
Service's analysis of types of mail is also telling. "Nonhousehold to
nonhousehold" (presumably business to business mail) has dropped
from 37 percent to 26 percent of total volume from 1987 to 2001.
Household to household (presumably personal mail) has remained
relatively insignificant, at 7 percent in 2001. That leaves mail between
households and nonhouseholds, presumably businesses to individuals
with a dominant 67 percent of volume. That segment may also melt
away as electronic bill payment and other new services become more
common. [5]

USPS
Transformation Plan. To its credit, the Postal Service recognizes that
it is in trouble, and that it needs to significantly change. To this end, it announced
last April a comprehensive "transformation plan" proposing a
wide-ranging set of reforms. It has already begun to
implement many of the management reforms in the plan, such as cost
savings. This is good
news, but - as the General Accounting Office pointed out in a
recent report - there is still reason for concern.[6] Among other things, GAO
points out that historically, USPS has had difficulty sustaining
cost savings, employee-related costs are expected to continue
increasing, and that many of the cost savings were gained through a
freeze on capital spending rather than long-term policy
changes.

Beyond management
issues, the Transformation Plan also proposes a number of reforms
aimed at providing USPS wider flexibility in its operations. These include wider powers
to raise capital and to set rates, as well as expanding its lines
of business to related field such as e-commerce, transportation,
and printing.

The case for
increased flexibility is sound. In today's markets, access
to capital and the ability to price dynamically for varying
consumer demands (as firms in many historically regulated
industries have found) are critical. So too, is the ability to
diversify lines of business, especially for companies in declining
businesses.

Special
protections.

In effect, the
USPS is arguing for the same business tools enjoyed by ordinary
firms. The problem, however, is that the USPS is no ordinary
firm. It enjoys a wide
range of perquisites and protections tied to its government status,
ranging from exemption from taxation to implied guarantees from the
U.S. Treasury.

Foremost among
these is the legal monopoly on delivery of letter mail, making
competition with the Postal Service a criminal offense. Notably, while such legal
monopolies were once common, mail delivery is now one of very few
industries under such restrictions. Over the past 25 years,
legal restrictions on competition in most other protected
industries - ranging from telephone service and cable TV to air
travel and trucking -- have been lifted.[7]

Providing USPS
with the operational flexibility it seeks without addressing these
special protections would create very real concerns that the Postal
Service could distort markets to the detriment of consumers. Perhaps more importantly,
eliminating special privileges and protections would be good for
the Postal Service itself. Insulation and protection
from market forces helped foster much of the system's inefficiency
in the first place, reducing its ability to respond to today's
challenges. The
fundamental culture of the Postal Service needs to change, and such
change will be spurred by more - rather than less -
competition.

Universal
service.

It
should be noted that additional competition is not inconsistent
with universal service obligations. In several other industries
where competition has been introduced, support for service in
high-cost areas has been continued by replacing cross-subsidies
with explicit subsidies. In the airline industry,
for instance, the Essential Air Service program was created by the
Airline Deregulation Act of 1978 to fund service to small
communities. On a much
larger scale, the Telecommunications Act of 1996 provided for an
extensive system of explicit subsidies to take the place of telecom
cross-subsidies to rural areas.

This
is not to say that these subsidies themselves are necessary or
justified. Like postal
subsidies, airline and telecommunications subsidies provide support
without reference to individual need. The troubling result is
that many poor consumers pay to support wealthier consumers. Nevertheless, by
making subsidies explicit, the issue of universal service subsidy
can be decoupled from the issue of competition in an industry -
allowing each to be evaluated on its own merits.

Conclusion.

This Commission
has been given a difficult challenge: to examine an extensive set
of issues surrounding the Postal Service. Members will no doubt be
inundated with information regarding the operational details of
USPS and the mailing industry. At the same time, however,
the fundamental changes taking place in postal services calls for a
long-term assessment, and a focus on the fundamental basis under
which the USPS will operate. And this means a
reevaluation of the Postal Service's mission, its governmental
status, and the competitive protection it receives. These issues are certainly
not without controversy, but provide the best opportunity for the
Commission to deliver real benefits to U.S. consumers.

[3] U.S.
Department of Commerce, Economics and Statistics Administration and
National Telecommunications and Information Administration, "A
Nation Online: How Americans Are Expanding Their Use of the
Internet," (February 2002).

[4]
"Briefing for the President's Commission on the United States
Postal Service," January 8, 2003.

[6]
General Accounting Office, "Major Management Challenges and Program
Risks: U.S. Postal Service, January 2003.

[7] For a
summary of the consumer benefits of competition in these
deregulated industries, see, Robert Crandall and Jerry Ellig,
"Economic Deregulation and Consumer Choice: Lessons for the
Electric Industry, Center for Market Processes (1997).

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